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Everyone Should Read Floyd Norris

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Friday, 18 March 2011 05:16

Floyd Norris has a good piece about how overconfidence in the ability to deal with risks led to both the financial crisis and the crisis with Japan's nuclear power plant. The piece makes the essential point that seems to have escaped great economic thinkers here, that there is no way Japan can default on its debt.

Even though Japan's debt is more than twice its GDP (about three times the size of the U.S. debt), there is no risk of default since its debt is in its own currency. In this way Japan is like the United States and the United Kingdom, and unlike Greece and Ireland.

In the worst case scenario, Japan or the United States would print lots of money and see inflation. Given that Japan has been flirting with deflation for almost two decades this doesn't seem like a plausible scenario, but in any case it is not the story of Greece being held at the mercy of the bond vigilantes who will not buy its debt.

The people who hold up Greece's crisis as a possible scenario for Japan and the United States deserve our contempt if they are deliberately misleading their audience or our empathy if their mistake stems from their problems with understanding basic economics. However their arguments do not deserve serious consideration by people involved in policy debates.

Comments (16)Add Comment
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written by John Emerson, March 18, 2011 7:08
Contempt.

The American media narrative of today is like the American media narrative in 1998 right before the Spanish Civil War. Vetting it for accuracy is of small importance; the goal in 1898 was to create an immediate public mood favoring intervention, and the words said were throwaways, to be forgotten once the war was started.
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written by John Emerson, March 18, 2011 7:30
Damn. Spanish American War, 1898.
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written by Lofty, March 18, 2011 8:54
Nice to see you got a mention in the piece.

Those who counseled otherwise were viewed as alarmists.
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written by Lofty, March 18, 2011 8:56
nice to see you got a mention

Those who counseled otherwise were viewed as alarmists.
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written by skeptonomist, March 18, 2011 9:05
Japan does have a positive balance of payments. The options open to creditor nations are different from those of debtor nations like the US. (Not that Japan's current status does not make complete nonsense of many claims about debt and inflation.)
Inflation in Japan
written by Tony, March 18, 2011 9:12
I am not as convinced as some that inflation, even serious inflation cannot return to Japan and even perhaps the United States. Deflation can turn into inflation rather fast, if the will of the people or the government changes. Economist know this, and that is why they are so divided on whether inflation or deflation is the greater threat. Since everyone has gone off the gold standard, inflation seems to win more often then not. Japan is the glaring exception. I wonder how much longer this can continue in Japan with all the debt they have and with such low interest rates they offer. I agree with Dean, the case for default is very low, but I'm not sure we can say the same about the threat of inflation.
Risks Can be Avoided by Selling Rags on the Street
written by izzatzo, March 18, 2011 9:34
... overconfidence in the ability to deal with risks led to both the financial crisis and the crisis with Japan's nuclear power plant.


The 'once-in-a-century' models of risk incidence don't work any more because the free marketeers who advance them exploit the very models they praise and defeat exactly the claimed intentions of their design.

Alan Greenspan is a prime example of one who simultaneously advanced the notion of risk diversification with modern global finance to increase home ownership, at the same time nurturing a hyper-leveraged shadow banking sector on grounds that regulating it was too risky and could stifle housing growth.

Remarkably, Greenspan wrote off the financial crisis and recession as a 'once-in-a-century' incidence of acceptable risk and proceeded to rescue his reputation while blaming government intervention for making the recession worse with moral hazard expectations going forward.

Overconfidence in the ability to deal with risk has been manufactured by the very ones who have become expert - and wealthy - at avoiding risk, whether through private market power, huge hidden transaction costs or intervention by the very nanny state they claim to despise - to shield them and their economic rent from effective competition.

As Noam Chomsky once said, should the wealthy ever be required to face the gail winds of free market competition they so joyously praise, most of them would be selling rags on the street.
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written by Locus, March 18, 2011 10:18
You just got to love the lack of self-awareness exhibited by Baker. He starts off the piece noting that disasters are often the result of people underestimating the risks of their policies but ends the piece by sneering his contempt for anyone who thinks that running up huge debts poses any risk whatsoever. Why does it never occur to arrogant schmucks to take a moment and look in the mirror and say to themselves, "Hey, maybe I'm the one underestimating the risks this time". Nothing is more dangerous than hubris, be it in Washington, on Wall Street or in academia.
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written by Locus, March 18, 2011 10:18
You just got to love the lack of self-awareness exhibited by Baker. He starts off the piece noting that disasters are often the result of people underestimating the risks of their policies but ends the piece by sneering his contempt for anyone who thinks that running up huge debts poses any risk whatsoever. Why does it never occur to arrogant schmucks to take a moment and look in the mirror and say to themselves, "Hey, maybe I'm the one underestimating the risks this time". Nothing is more dangerous than hubris, be it in Washington, on Wall Street or in academia.
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written by liberal, March 18, 2011 10:49
Tony wrote,
Economist know this, and that is why they are so divided on whether inflation or deflation is the greater threat.


Not true. It's clear from economic history that deflation is (a) far more destructive than inflation (unless we're talking about hyperinflation, which isn't going to happen),and (b) far harder to combat.
Hey Locus, Where are these "Huge Debts?"
written by Paul, March 18, 2011 11:24
You do realize the both the U.S. federal "debt" and Japan's national "debt" are not real debts at all, don't you? After all, what kind of real debt can be paid off at will with money that the debtor can print in unlimited quantities?

Do you think Japan and the U.S. are still on the gold standard?
Incorrect Liberal
written by Tony, March 18, 2011 2:09
First, economist are very divided on whether deflation or inflation is the greater threat. Almost all Keynesian economist fear deflation is coming, and almost all Austrian economist fear inflation is coming, with even Friedman economist divided. And once almost everyone went off the gold standard in the 1930's, you would be very hard pressed to find any deflation around the world. When you have a fiat currency, its pretty hard to have deflation, since you can now print all the money you want to solve your economic problems. Japan is the one exception, and even there deflation is very mild, nothing like the 1930's. And you are wrong about hyperinflation. It is possible. Granted, its not likely in my opinion, but it is still possible. Have you forgotten that economics is a social science, and there are very few absolutes in this business. Anyone who reads Dean Bakers blogs should know that.
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written by zinc, March 18, 2011 8:48
I agree with the direction of Locus' comment but certainly not the motivation, perhaps, or all of the conclusions.

Someone pays for inflation, and it ain't the Aristocracy. It is the citizen savers who pay for the Bush family debt. Hey Locus, WTF were you and your fascist buddies when the Republicans were blowing up the world ?

And where are you now that the obvious solution is to raise the tax rate on the big winners and the tax on the transfer of unearned income on death ?

Dean,

You know who pays when the government prints money, creating inflation. I agree with you that logic left the equation when peerage re-gained the day, when the corrupt Supreme Court anointed the Harvard trash, GWB, president.
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written by Locus, March 18, 2011 10:38
Hey Paul, if U.S. government debt is "not real debt" and can be run up forever without consequences then why does the I.R.S bother to collect taxes? Why don't we just print all the money we'll ever need? Why not print enough to make everyone a millionaire so everyone can retire in comfort?
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written by Calgacus, March 19, 2011 1:16
Locus: The primary function for tax collection is to create demand for money - to prevent inflation. Government debt - which includes dollar bills, bank reserves is real debt - it can be used to extinguish a taxpayer's debt going the other way. But it is no burden at all to the government.

Growing economies, growing populations need more money, people want to save money, so the normal and healthy situation of a government is to spend more than it taxes - to issue more IOUs than it calls in - to run a deficit. Balanced budgets, let alone surpluses, are generally dangerous to economies.

I agree that Bush used his deficits (good) for the worst purposes imaginable - war and making the rich richer and the poor poorer, and taxing the rich would be a splendid idea. That doesn't make basic finance and accounting false (even though the innumerate economic orthodoxy of the last few decades rejects accounting).
certification
written by Tempus Fugit, March 20, 2011 11:45
Locus: from which school were you granted a Ph.D. in economics? How many books have you published in the area? How invested are you in making comments as above? Is your livelihood on the line? Is your professional reputation at stake?

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About Beat the Press

Dean Baker is co-director of the Center for Economic and Policy Research in Washington, D.C. He is the author of several books, his latest being The End of Loser Liberalism: Making Markets Progressive. Read more about Dean.

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